Pay local

Nobody would want to pay New York prices for a house in North Carolina, and one company certainly didn’t want to pay New York prices for attorneys’ fees awarded in a North Carolina case. That company may now get some of the relief it wanted after the state Court of Appeals handed down a ruling Dec. 3 creating a new test for what to do when out-of-towners hand in gaudy billing sheets.

GE Betz and Zee Company are both in the business of providing chemical treatments for water in commercial and industrial processes. Zee hired away some GE Betz employees, and GE Betz alleged that the employees, with Zee’s encouragement, began raiding its customer base and disclosing confidential information in violation of their employment agreements. GE Betz sued Zee in a North Carolina state court, which found in favor of GE Betz, ruling that Zee had interfered with the employment contracts.

GE Betz submitted a legal bill of nearly $5.77 million dollars, including billing from both North Carolina-based Ward and Smith and New York City-based Paul Hastings. Most of that sum was earmarked for Paul Hastings because even though none of its attorneys ever appeared before a North Carolina court during the whole case, it bills at New York City rates—its lead attorneys charged roughly twice as much per hour as the lead attorneys at Ward and Smith.

The trial court awarded GE Betz the full amount of its fee request. Zee appealed, arguing that it was unreasonable for it to pay the going rate for legal services in New York City for a case litigated in New Hanover County, where rates are much lower. On appeal, the Court of Appeals affirmed that GE Betz was entitled to attorneys’ fees but remanded the matter back to the trial court to determine whether the amount of fees awarded was reasonable.

Local counsel, local rates

Although North Carolina appellate courts have ruled that going rates in the geographic area where a case takes place are relevant to deciding if a fee award is reasonable, they had never decided whether fees had to be awarded in relation to those rates. The court chose to partially adopt the reasoning of the federal Fourth
Circuit, which has held that the community where the court sits is the appropriate starting point for selecting the proper rate, but that trial courts must dig deeper when local counsel lacks the expertise to adequately represent a client.

The federal test, however, also requires courts to decide whether the litigants made a reasonable choice in hiring the out-of-town counsel. In contrast, the Court of Appeals found that the issue was whether the fees awarded against an adverse party are reasonable, not whether it was reasonable for those fees to be incurred by the prevailing party.

In this case, even though Ward and Smith is a well-qualified firm, it had no prior relationship with GE Betz, whereas Paul Hastings had represented GE and its affiliates for 30 years and maintains a GE client service team. The court thus found that the company’s decision to hire Paul Hastings was entirely reasonable, but said that did not end the court’s inquiry—it also had to consider whether services of similar quality were available locally.

The court found that much of the work performed by Paul Hastings’ attorneys could have just as effectively been performed by local counsel at local rates, a distinction the trial court did not attempt to make. Some of Paul Hastings’ fees were for duties that clearly did not require a prior relationship or intimate knowledge of GE’s employment contracts, because GE Betz paid Ward and Smith attorneys to perform almost identical work during the same period.

“We find it unreasonable to force Zee to pay a fee that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium,” Judge Robert C. Hunter wrote for a unanimous court. “Ultimately, GE’s willingness to pay significantly higher rates for work that they could have procured for much less does not necessitate a finding that those fees are reasonable when awarded against Zee. Rather, the court must make additional findings which demonstrate why awarding such unusually high fees in the community where the litigation took place is reasonable.”

Accordingly, the appeals court found that the trial court abused its discretion by awarding the entire fee billed by Paul Hastings against Zee without conducting any inquiry as to which of the services rendered by Paul Hastings’ attorneys could have been performed by local counsel at reasonable rates within the community.

Punitive damage award gutted

Zee picked up another big victory when the Court of Appeals slashed the punitive damages awarded to GE Betz by 80 percent, from $4.324 million to $864,891. The trial court calculated the statutory cap on punitive damages based on the number of individual defendants, but the trial court ruled that the cap applied to each plaintiff, not each defendant. As a result, the attorneys’ fees award is now several times larger than the size of GE Betz’s actual verdict.

Attorneys for Zee and its employees said that they had emphasized the size of the award—the largest in the history of the state’s courts in a non-class action case—relative to the results achieved when arguing that the award was not reasonable, but that the court did not address this argument in its opinion.

“The Court of Appeals was certainly right to address the rates, but there was a much bigger picture,” said Matt Sawchak of Ellis & Winters in Raleigh, who represented the individual employees. “This was a situation in which there was both a zebra and an elephant in the room, and the Court of Appeals correctly addressed the zebra, but it really didn’t say anything about elephant.”

John Wester and Pearlynn Houck of Robinson, Bradshaw & Hinson represented Zee.

The 64-page opinion is GE Betz, Inc. v. Conrad (Lawyers Weekly No. 13-07-1172). The full text of the opinion is available online at nclawyersweekly.com.

Follow David Donovan on Twitter @NCLWDonovan